The cost of living crisis is leaving absolutely nobody unaffected. Whether it’s us struggling with our own utility bills, or even struggling to make ends meet. And it is certainly affecting all businesses in the country. Regardless of size, experience or industry. And moreover all business structures. Whether it’s public companies, sole traders, or the self-employed, everybody is affected by the rising cost of living. However, if you are indeed a business owner, there are tools and resources out there that can help your business both in its approach and the handling of its financial affairs. And one such way is called the profit first approach and that’s what we are going to be looking at in more detail today.
What is profit first?
The profit first approach requires your business to deduct any profits made from your payments before expenses are. Essentially, this decision means you are no longer paying yourself with what is left over after you have taken your expenses out. Prioritising the profit. The approach requires that you transfer pre-agreed percentages of your incoming funds (e.g. sales, invoices) into different accounts within your business to cover expenses such as taxes and overhead costs. The pre-agreed amount will be determined by something called TAPS or Target Allocation Percentages.
There is also CAPS or Current Allocation Percentages. These pre-determined percentages likewise allow you as a business owner to start understanding how your finances are being respectively allocated. With TAPS being where they would ideally be split.
What are the benefits of the profit first method?
The main idea behind this blog is to point out the advantages of the approach and how it can help your business in a time where any help could be the difference between your business surviving through the cost of living crisis or not. So what are the main incentives and benefits behind adopting this approach in your business?
- Compared to other approaches, it is relatively straightforward and not time-consuming to implement into your current business model and operations.
- It puts your mindset’s focus on profit rather than on revenue.
- As soon as it is implemented, it will as of that moment start showing results in your profit section in your profit and loss statement.
- As a business owner, it will start to encourage you to be more proactive when it comes to setting the profit margins on your products and/or services.
How do you implement the profit first model?
Unfortunately, there is no set way that the approach can be implemented into your existing business operations. It is relatively straightforward to implement, but it all depends on how your business is currently set up. It may be worth seeking the advice of qualified professionals such as ourselves to advise you on how best to adapt the approach to your business.
To begin with, they will help you in identifying where the current money leaks are in your existing model and setup. And they will also identify areas where you are at present focusing on profitability but can be improved. An example of this is if you are currently using credit cards for payments, instead ditching this approach and opting for BACS transfers will reduce your credit and can help you increase your profit margin.
How does it differ from the traditional method?
There is a simple formula that sums up how you would traditionally calculate your profit which is:
Sales – Expenses = Profit
Instead, as the name suggests, this approach moves profit before expenses and thus the formula is then represented as:
Sales – Profit = Expenses
This means that immediately, right from the off, you are accounting for your profit, taxes, and other costs. Once you have accounted for these; you then know what budget your business has to cover other expenses such as rent, salaries and utilities. To some, this may seem at first a bit more of an awkward way of planning your finances. But in the long run, it allows you as a business owner; to become more conscious of where your business is spending money. Thus allowing you more control and the ability to cut back where is necessary.
How can we help?
Here at D&K Accounting, we are trained and qualified profit-first professionals. As a team we have adapted this approach throughout both our own businesses and aided others in doing the same. We have seen first hand the benefits it can have on businesses and how it can help it setting them on the right mentality to keep the focus on where it should be when it comes to their business’s finances. We are more than happy to explain more about the approach should you want to know more and we can also help with how to implement it into your existing business model and help guide you on the road to putting profits above revenue and transforming your business mentality for the better.